As Auto Lending Delinquencies Rise, Discrimination Is Even More Dangerous To The Economy

Americans presently owe $1.3 trillion in auto loan debt, the equivalent of 5.5% of GDP. Auto loan originations totaled $584 billion in 2018, the highest year in the 19-year history of the data for auto loan originations, in nominal terms, and an increase from 2017’s $567 billion.

There should be significant concern that the significant rise in automobile debt could leave millions of Americans financially vulnerable, particularly when we enter the next economic slowdown or recession. Not only have car loans risen, Americans are carrying car loans for longer periods of time. According to “Driving Into Debt, The Hidden Costs of Risky Auto Loans to Our Customers and Communities,” a report with extensive data and facts showing discrimination in lending and other abusive practices, “Of all auto loans issued in the first two quarters of 2017, 42 percent carried a term of six years or longer, compared to just 26 percent in 2009.”

Auto loans outstanding have risen significantly since the 2008 crisis.

Driving Into Debt

Unsurprisingly, auto debt per capita is significantly higher in states, like Texas, where there is the least amount of public transport.

Defaults in the 18-29 age group are much higher than other age groups.

Federal Reserve and Equifax

Car ownership will continue to be indispensable to the economic well-being of Americans due to decades of government transportation policies. Since 1956, legislators have disproportionately ignored investments in other forms of transportation infrastructure such as rail. According to Driving into Debt, “Access to a vehicle is necessary to reach jobs and economic opportunity in much of the nation. Even in the nation’s most transit-oriented metropolitan area, New York City, only 15 percent of jobs are accessible within an hour by transit, as opposed to 75 percent within an hour’s drive. Other cities with less robust transit systems have even fewer jobs accessible via transit.”

Government Capital Investment In Transportation Since 1956.

Source: Congressional Budget Office, Public Spending on Transportation and Water Infrastructure, 1956 to 2017, October 2018

To put auto loans into context, as of December 31, 2018, total household indebtedness was $13.54 trillion. Aggregate household debt increased in the fourth quarter of 2018 for the 18th consecutive quarter and is now $869 billion (6.9%) higher than the previous (2008Q3) peak of $12.68 trillion. After mortgages, car loans have been the highest level of Americans’ debt, but recently student loans have overtaken auto loans.

Household debt is 7% than the last indebtedness peak in the third quarter of 2008.

Federal Reserve and Equifax

During today’s congressional hearing, Attorney John W. Van Alst of the National Consumer Law Center and Director of NCLC’s Working Cars for Working Families Project, cited research by Professors Ian Ayres and Peter Siegelman, that “Consumers of some races and ethnicities are sometimes charged hundreds and even thousands of dollars more to finance a car and are charged more for the car itself.” Additionally, their research found that “they are more likely to be pressured to buy add-on products such as service contracts, sometimes being told that the add-ons are required, and then are charged more for those same add-ons. Attempting to negotiate for better terms has been shown to not be effective to address these disparities.” Van Alst explained that “These disparities make cars more expensive for some races and ethnic groups and keep some families from getting a car at all. They contribute to the differences we see in the ability of families to get a car. Of households that are at or below the poverty line, 13% of White households lack access to a car, compared to 31% of African American households and 20% of Hispanic households.” According to him, “Many disparities arise because the market for cars is troublingly opaque and inconsistent. A more consistent and transparent marketplace would not only benefit consumers of color but all marketplace participants, including car dealers, finance entities, and insurers that want to compete fairly and openly on price and quality on a level playing field.”

Cross pointed out a variety of areas where abuses in auto lending take place. One major area of abuse is excessive interest rates. “Dealers have the ability to mark up the interest rates they receive from the lenders to whom they sell their finance contracts, pocketing the difference as profit.”

President and Executive Director Lawyers’ Committee for Civil Right Under Law Kristen Clarke testified that “One of the most pernicious ways in which racial bias seeps into auto lending is through discretionary dealer markups. Indirect auto lenders often have no controls in place to prevent discretionary markup pricing disparities resulting from car dealers’ racial bias, resulting in people of color being burdened with more expensive car loans than white consumers.”

Clarke cited a 2018 study by the National Fair Housing Alliance “using matched pair testers in Virginia showed that almost 63 percent of the time, borrowers of color received costlier auto loans even though they were more qualified than their white counterparts and that the borrowers of color would have paid an average of $2,351 more over the life of the loan as a result of the discrimination.”

Policy Advisor Joshua Rivera, of Data and Poverty Solutions at the University of Michigan, cited a number of important studies showing discrimination in auto insurance rates against minorities and women. Several studies in recent years provide suggestive evidence of disparities in auto insurance premiums.

"In 2007, a study in Los Angeles found that auto insurance rates were higher in low income and minority neighborhoods, even after accounting for common risk factors cited by insurance companies in setting premiums.11 A decade later, ProPublica issued a report on auto insurance prices, which found that drivers in predominantly minority ZIP codes were being charged higher rates, as compared to similar risky drivers in predominantly white areas. In 2017, the Consumer Federation found that, all else being equal, women over the age of 25 pay more for auto insurance than men. In addition, just this year, the Zebra issued a report showing that on average women now pay more than men in 25 states. Efforts to reduce auto insurance rates need to address disparities in pricing in order to achieve meaningful improvements in affordability."

James Lynch, Chief Actuary and Senior Vice President of Research and Education Insurance Information Institute testified that “Because of court cases and federal legislation that stretch back decades, insurance companies are primarily regulated at the state level. Every insurance company must satisfy the laws and regulations of every state it operates in, plus the District of Columbia. So most large insurers, have 51 sets of laws to follow and 51 sets of regulators to satisfy.”

Auto loan originations by credit score

Federal Reserve Bank of New York

During his testimony, Rivera said that in Michigan recommended that the use of non-driving factors in setting rates, such as credit scores, should not be used. A number of states already prohibit the use of credit scores to set interest rates for car loans. During the hearing, Representative Rashida Tlaib objected to the use of non-driving factors such as marital status to determine your insurance premium. Tlaib referred to an article published a few days ago “Why do minorities pay more for car insurance?” “By and large, the insurance industry has never admitted that black Americans pay more for car insurance. In fact, they are often downright defensive... and offensive. In 2014, the National Association of Mutual Insurance Companies sent a letter to the Federal Insurance Office that insinuated black Americans can afford to pay more for car insurance because...wait for it… they spend money on their pets, toys, alcohol, tobacco, and recording equipment, like normal humans, often do.”

Rep. Rashida Tlaib, D-Mich.

Additionally, Van Alst recommended that federal and state policymakers should:

Ban dealer interest rate markups. Any compensation paid to the dealer as part of the financing process should not be based on the interest rate or other financing terms, and should be consistently applied to all transactions.

Increase enforcement against general abuses in the sale and financing of cars. Given the evidence of discrimination in the sale and financing of cars, it is likely that many other abuses, from yo-yo sales to failure to pay off existing liens, are more likely to affect people of color. Stepped-up enforcement against all abuses in the sale and finance of cars could help address disparities and level the playing field for everyone.

The other panelists also recommended that data collection from auto lenders be collected that the Department of Justice and Congress should not abdicate their responsibility to eliminate discrimination in auto lending and in car insurance premia.